Recently, I met someone in their early thirties that didn’t have a driver’s licence.
Naturally, my next question was “Trust fund, eh? And if not, what line of business allows you to have a full time chauffeur?”
Entertainingly, the answer was “Marriage”.
But that aside, Uber has brought chauffeuring within affordable reach. No longer do you need to own the car and employ the driver. Obviously, we’ve had taxis for a long time – but somehow, this feels more like being chauffeured*.
*I suspect that this has something to do with repeat business. Taxi drivers know that they’re unlikely to ever see you again – so if they’re profit-maximising, they’ll aim to make the highest fare possible off you. Uber drivers, however, know that their passenger ratings determine not only future business, but also whether Uber will continue allowing them to drive under the Uber banner. And I think it also helps that the rate is not up for negotiation.
So now that it’s affordable, we can now ask fun questions like “When can I dispense with car ownership?” and “Do I still need to hire a car at the airport?”
Building A Model
I like this kind of question because I think that you can get to some kind of a formula pretty quickly.
Here are the costs of driving a car:
- Your monthly car repayment (including a maintenance plan)
Here are the costs of an Uber driver:
- Monthly car repayment (including a maintenance plan)
- Cellphone data
- His salary (20% of the fare price)
- Uber’s take (20% of the fare price)
- Profit (say, 20% of the fare price in normal hours – MUCH higher during surge pricing)
So on the face of it, you might say that Uber is clearly more expensive – because at least 60% of the fare is extra.
Some mitigating factors:
- Uber drivers drive around all day, almost every day. Which means that their monthly-car-repayment per trip is pretty close to negligible. That is: they use the asset very efficiently*.
*Example: let’s say that an Uber driver does 25 trips a day, 22 days a month. If his monthly car repayment is R5,000 – his cost per trip is R9.
- You, on the other hand, drive around for a bit in the morning, and a bit in the evening, and the car has to spend the rest of that time being parked. Your “owning a car” cost per trip is not negligible. It is high. And it has parking costs attached to it (including higher housing costs – because you’ll be buying a place with a garage).
*Using a similar example, if you do 3 trips a day on average, 30 days a month, off a monthly car repayment of R5,000 and monthly parking costs of R700 – your effective cost per trip is R63. Which is 7 times as high as the Uber driver’s.
- There is also some opportunity cost involved – you might be one of those people that can work in a car if you’re not driving.
Given that, we could probably identify a point at which you’d be ambivalent between owning a car and just using Uber. It would be where:
Your Monthly Car Repayment + Parking Costs + Opportunity Cost of Driving
is equal to
The extra 60% of your total Uber spend that goes to Uber and the Uber driver
A Test Run
Speaking for myself:
- Monthly car repayments would probably fall in the R3,500 region;
- Parking costs… maybe an extra R1,500, taking into account higher rentals and car-guard tipping and the astonishing cost of parking in malls;
- I don’t really have an opportunity cost of driving – I make calls on the hands-free, or I listen to podcasts. In fact, I’m almost protective of my time in traffic. It’s valuable.
So where that leaves me: about R5,000 in differential cost.
And if that were equal to 60% of the Uber fare, that would mean a monthly Uber spend of R8,333 – or about R275 per day.
That is: if I would normally spend less that R275 per day on Uber fares, then I should sell my car and Uber everywhere.
Here’s my check:
- According to the fare estimate on UberX, it would cost me around R53 to get from home to work (7 km). So that’s R106 return per day.
- It would cost me R86 to get to gym from the office (10 km) – but only R54 to get home from there, so there’d be no difference between getting home from gym or the office.
- That’s already R192.
- All I’d need is a few trips to business meetings during the day before that R275 would get blown out the water.
So basically, this is a mileage issue. With a R275 daily Uber budget, my guess is that you’re looking at around 40 km per day in actual distance travelled, depending on times of day, etc.
If you’re doing more than 1,200 km in a month, then you definitely need the car.
And even if you’re doing less – you wouldn’t really want to call Uber to come and fetch you each time you want to take a small trip down to the shops. There is independence at stake.
But Speaking For Married Couples…
I think that you might be looking at a different story altogether:
- If one of the partners is pretty much office-bound – then their differential mileage might be significantly lower than 1,200 km per month. And in the evenings and on weekends, the couple would usually do stuff together.
- At the same time, the differential parking cost saving is higher – because if you’re down to one car, you start looking for homes and/or apartments that have one off-street parking rather than two.
So given my opening paragraphs, isn’t that ironic…
For more on this, albeit with a strong American emphasis, check out:
- The Economics of Car Ownership
- Is Uber Cheaper Than Owning A Car?
- A Financial Model Comparing Car Ownership with UberX
Rolling Alpha posts opinions on finance, economics, and the corporate life in general. Follow me on Twitter @RollingAlpha, and on Facebook at www.facebook.com/rollingalpha.
Dave C October 15, 2014 at 09:14
What about your monthly petrol cost?Reply
Jayson October 15, 2014 at 09:21
It’s not a differential cost – because if you pay for your own petrol, or if you compensate the Uber driver for his – you’re still going to be paying for it either way?
I guess there is some discrepancy around fuel consumption – but I’d also guess that, if anything, the Uber driver will be more conscious about keeping his fuel consumption low because it’d make more of a difference to his monthly profit…
Also, because Uber sets the rate (and the effective profit) – I reckon that any excess fuel consumption by the Uber driver will directly impact his profit-percentage.
So on that basis, I could ignore the fuel cost as irrelevant in the decision-making.
Unless there’s something that I’m missing?Reply